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Our perspective on the fintech world

Zelle and FedNow Struggle to Protect Account Holders From Themselves

As the Fed prepares to roll out the FedNow instant payment system later this year, it’s trying to prevent one of the major fraud issues plaguing Zelle for account-to-account transfers. However, solving this challenge will be next to impossible.  For an irrevocable payment service (like Zelle and FedNow), where transactions can not be reversed, it’s exceedingly difficult to protect users from themselves.

For decades, consumers have been trained by the card networks to believe that they are protected from fraudulent transactions.  In a world where my card number can be compromised and easily used by a fraudster, the card networks need to provide this type of consumer protection.  But Zelle and FedNow are more like cash: it’s clearly illegal for someone to pry funds from your wallet without your approval, but if you hand it over to someone on your own accord, you can’t claw the funds back, regardless of the circumstances.

From a legal point of view, a federal court in NJ recently ruled that financial institutions have no obligation to reimburse account holders who initiate Zelle transfers themselves, even when a scammer had convinced the customer to send a payment under false pretenses.  In this case, the court found that the transfer was “authorized” since it was initiated by the account holder, not by an unauthorized third party. 

But bad PR hurts almost as much as a lawsuit, and Zelle has been in the crosshairs – just Google “Zelle fraud” and check out the stream of negative news articles.  Even though financial institutions may not be liable for these types of scam transactions, the consumer complaints continue to pile up.  So much so, that Senator Elizabeth Warren recently issued a report that indicated the Consumer Financial Protection Board (the CFPB) was already considering strengthening the regulations “to cover more fraudulently induced transactions.”  So the ground may be shifting and banks may be forced to reimburse more scammed consumers.

In the meantime, banks are left with few effective measures to reduce these types of fraud issues beyond helping educate the consumer.  Indeed, according to Nick Stanescu, senior vice president and business executive for the FedNow Service, “Education will be key”.  Consumers need to understand that once a transfer has been sent, it’s gone.  Only then will consumers take sufficient care and responsibility when using these instant payment services.